FEDERAL COURT OF AUSTRALIA Sims v Suda Ltd [2016] FCA 1086 Appeal from: Sims v Suda Ltd [2015] FCCA 2934 File number(s): WAD 627 of 2015 Judge(s): SIOPIS J Date of judgment: 7 September 2016 Catchwords: CONTRACT – indemnity clause in an executive employment contract – former director unsuccessfully brought a claim against the company of which he was formerly a director – indemnity costs awarded against the former director – whether the indemnity clause operated to indemnify the former director against the indemnity costs order. Legislation: Australian Consumer Law at Sch 2 to the Competition and Consumer Act 2010 (Cth) s 18 Trade Practices Act 1974 (Cth) s 52 Bankruptcy Act 1966 (Cth) s 40(1)(g) Corporations Act 2001 (Cth) ss 199A(2), 199A(3) Cases cited: Sims v Suda Ltd (No 2) [2015] FCA 281 Date of hearing: 12 May 2016 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 33 Counsel for the Appellant: The Appellant appeared in person. Counsel for the Respondent: Mr N Ebbs Solicitor for the Respondent: Bennett + Co ORDERS WAD 627 of 2015 BETWEEN: DOUGLAS ARTHUR SIMS Appellant AND: SUDA LTD (ACN 090 987 250) Respondent JUDGE: SIOPIS J DATE OF ORDER: 7 SEPTEMBER 2016 THE COURT ORDERS THAT: 1. The appeal is dismissed. 2. The appellant is to pay the respondent's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT SIOPIS J: 1 This is an appeal against a decision of the Federal Circuit Court of Australia, dated 27 October 2015, which dismissed an application by the appellant, Mr Douglas Sims, to review the decision of a Registrar of that court, dated 1 October 2015. The Registrar's decision was to refuse to set aside a bankruptcy notice addressed to Mr Sims. background 2 On 2 October 2007, Mr Sims entered into a written contract of employment with the respondent, Suda Ltd, then known as Eastland Medical Systems Ltd. Clause 14 of that contract was an indemnity clause. It is this clause which is at the centre of this proceeding. 3 After Mr Sims' resignation as a director and executive of Suda Ltd on 9 June 2009, Mr Sims has, at various times, commenced and prosecuted a number of legal proceedings against Suda Ltd in the Commonwealth courts and the courts of the State of Western Australia, including the District Court of Western Australia and the Supreme Court of Western Australia. 4 On 14 August 2014, Mr Sims commenced a proceeding (WAD 255 of 2014) in this Court against Suda Ltd. In that proceeding Mr Sims made three claims. The first claim alleged breach of contract and statutory contravention. Mr Sims alleged that Suda Ltd had breached an agreement to indemnify him in respect of his legal costs pursuant to an obligation under a settlement deed, dated 22 December 2010. Mr Sims also alleged that by breaching this contractual obligation, Suda Ltd contravened s 18 of the Australian Consumer Law (ACL) at Sch 2 to the Competition and Consumer Act 2010 (Cth) and, or alternatively, s 52 of the Trade Practices Act 1974 (Cth). The second claim appeared to be for compensation under an unparticularised contract to pay him for the development and subsequent transfer of trademarks and, again, for compensation under s 18 of the ACL and, or alternatively, s 52 of the Trade Practices Act and quantum meruit. The third claim was a claim for damages for fraud. 5 On 27 March 2015, Gilmour J struck out Mr Sims' pleading in WAD 255 of 2014 and summarily dismissed his application. Gilmour J also ordered that Mr Sims pay Suda Ltd's costs on an indemnity basis (Sims v Suda Ltd (No 2) [2015] FCA 281). 6 On 1 September 2015, the official receiver, on the application of Suda Ltd, issued bankruptcy notice BN184276 addressed to Mr Sims in the sum of $30,284.00 being the amount owed in respect of the indemnity costs order made by Gilmour J in WAD 255 of 2014. The bankruptcy notice was served on Mr Sims. 7 On 18 September 2015, Mr Sims filed an application in the Federal Circuit Court to set aside the bankruptcy notice. 8 On 1 October 2015, Mr Sims' application to set aside the bankruptcy notice was dismissed by a Registrar of the court. 9 On 12 October 2015, Mr Sims filed an application for review of the Registrar's decision dismissing his application to set aside the bankruptcy notice. the federal circuit court 10 On 27 October 2015, the primary judge in the Federal Circuit Court dismissed Mr Sims' application for review of the Registrar's decision (Douglas Arthur Sims v Suda Ltd [2015] FCCA 2934). 11 The primary judge found that the grounds of review, as formulated by Mr Sims, who was self-represented, were, save in one respect, irrelevant or misconceived. 12 However, the primary judge identified one complaint which merited full consideration. This was Mr Sims' contention that cl 14, being the indemnity clause in his contract of employment, operated in such a way as to require Suda Ltd to indemnify him in respect of the order that Suda Ltd had obtained in WAD 255 of 2014, that Mr Sims pay Suda Ltd's costs on an indemnity basis. 13 The indemnity is contained in cll 14.1 to 14.4 of the contract of employment which provide as follows: 14.1 Indemnity To the maximum extent permitted by law, the Company will indemnify the Executive and keep the Executive indemnified against any Legal Proceedings and any claims of any kind made against, suffered, paid or incurred by the Executive pursuant to, arising from or in any way connected with the Executive being an officer of the Company, the employment of the Executive by the Company and any act or omission by the Executive, directly or indirectly, connected therewith, or a breach by the Company of its obligations under this Deed. 14.2 Continuing Indemnity (a) The indemnity contained in this Deed in a continuing indemnity and is not voided or affected by the Executive resigning or otherwise ceasing to be or to act as an officer of the Company for any reason, or by the occurrence of any other event. (b) The indemnity given by the Company under this Agreement is irrevocable and will continue for the entire Access Period (which includes that period after the Executive ceases, for any reason, to be an officer of the Company) and is not affected by: (i) any intermediate payments, settlement of accounts or payments; (ii) delay on the part of the Executive; (iii) the death, bankruptcy, insolvency or liquidation of any person; or (iv) any other thing or matter which might otherwise affect the indemnity, whether in law or equity. 14.3 Payment on Demand (a) Any substantiated moneys payable by the Company under this Agreement and the indemnity are due and payable by the Company to the Executive on demand. (b) Any obligations under this Agreement must be performed and fulfilled immediately. 14.4 Notice of Claim The Executive must give the Company notice of any possible claim the Executive may have under Clause 16.1 as soon as reasonably practicable after becoming aware of an actual or threatened claim, proceeding or other circumstance which could give rise to such an indemnity claim. 14 The term "Legal Proceedings" is defined as follows: Legal Proceedings means proceedings of any kind including any enquiry by any authority or other person and includes also any claim, action, suit or demand, whether civil or criminal, which relate to or arise from or are in any way connected directly or indirectly with the Officer being an officer of the Company or the employment of the Officer with the Company or any subsidiary and any act or omission by the Officer and includes legal costs. 15 The primary judge considered whether Mr Sims' claim for an indemnity under cl 14.1 of the contract of employment might arguably constitute a "counter-claim, set-off or cross demand" under s 40(1)(g) of the Bankruptcy Act 1966 (Cth). 16 Section 40(1)(g) relevantly reads as follows: (1) A debtor commits an act of bankruptcy in each of the following cases: … (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia--within the time specified in the notice; or (ii) where the notice was served elsewhere--within the time fixed for the purpose by the order giving leave to effect the service; comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained; … 17 The primary judge held that cl 14.1 did not arguably provide Mr Sims with a right to be indemnified by Suda Ltd in respect of the indemnity costs order made against him in WAD 255 of 2014. This was because, said the primary judge, on its plain reading, the indemnity clause operated only in relation to claims against Mr Sims in Legal Proceedings (which is a defined term) and "claims of any kind made against, suffered, paid or incurred" by him. 18 The primary judge went on to say that there was a further qualification, namely, that the indemnity would operate in relation to any claim made against Mr Sims "pursuant to, arising from or in any way connected with" Mr Sims being an officer of Suda Ltd, or Mr Sims being employed by Suda Ltd or any act or omission by Mr Sims directly or indirectly connected therewith; or a breach by Suda Ltd of its obligations under the contract of employment. The indemnity, said the primary judge, did not operate in respect of claims which Mr Sims made against Suda Ltd. 19 The primary judge also considered the prospect that the concluding words of cl 14.1 might give rise to an argument that there was an obligation on Suda Ltd to indemnify Mr Sims in respect of costs orders made against him in proceedings wherein Mr Sims claimed a breach by Suda Ltd of its obligations under the contract of employment with Mr Sims. The primary judge said that such an argument would lead to an "odd result" and, in light thereof, that construction of cl 14.1 was not sufficiently arguable to warrant setting aside the bankruptcy notice. 20 The primary judge went on to find that, in any event, even if he was wrong on the construction of the indemnity clause, the claim Mr Sims now made was a claim that it was "at least open" to Mr Sims to have made before Gilmour J in WAD 255 of 2014 on the question of costs. Accordingly, the primary judge found that Mr Sims' indemnity claim did not, in any event, fall within the ambit of s 40(1)(g) of the Bankruptcy Act. the appeal 21 On 28 October 2015, Mr Sims filed a notice of appeal against the primary judge's decision. 22 Mr Sims' grounds of appeal focus on the primary judge's decision as to the construction of the indemnity clause. The grounds state: 1. The Honourable Judge erred at Law and fact in dismissing the Appellant [sic] irrevocable continuing indemnity granted to the Appellant by the Respondent on all and any costs arising from and connected to the Appellant being an Officer of the Respondent, as not applicable to the costs order of Justice Gilmour against the Appellant, the subject of Bankruptcy proceedings BN184276. 2. The contractual irrevocable indemnity granted to the Appellant by the Respondent prevents the Respondent from enforcing this payment as the Respondent granted the Appellant a continuing irrevocable immunity against any such enforcement by the Respondent. 3. The irrevocable continuing indemnity granted to the Appellant by the Respondent is final and cannot be revoked. 4. The Appellant entered this contract with the Respondent in good faith and relied on the irrevocable indemnity drafted, settled and ratified by the Respondents Remuneration Committee and its Members as binding and enforceable and could not be revoked. 5. The contracted irrevocable continuing indemnity is still the subject of Notice of Appeal before the High Court of Australia (P) 28 of 2015 & (P) 43 of 2015. 23 At the hearing, the Court was advised that both matters referred to in ground five of the grounds of appeal were applications for special leave; and that each had been dismissed by the High Court. That ground of appeal, accordingly, fell away. 24 The remaining grounds of appeal are, therefore, in essence, directed to the question of whether the primary judge erred in concluding that the indemnity clause did not oblige Suda Ltd to indemnify Mr Sims for the indemnity costs order made against him in WAD 255 of 2014. 25 In my view, the primary judge did not err in the conclusion to which his Honour came. 26 It is only the presence of the concluding words in cl 14.1: "or a breach by the Company of its obligations under this Deed" which complicates the construction of the indemnity in that clause. Leaving aside those words, it is clear that, as the primary judge held, the indemnity is intended to operate in relation to claims made against Mr Sims arising from or in connection with, whether directly or indirectly, his acting as a director or employee of Suda Ltd, even if the claims are made after he has ceased to be a director or employee. It may be difficult to conceive of a circumstance in which Mr Sims may be faced with a claim or a liability arising from Suda Ltd breaching its obligations under the contract of employment with Mr Sims. However, on the wording of the clause, it is only in that circumstance, that Mr Sims would be entitled to the indemnity referred to. 27 It was Mr Sims' contention, however, that the concluding words of cl 14.1 afforded him an indemnity in relation to any liability he may incur to Suda Ltd for costs in any legal proceeding which he brings against Suda Ltd whether or not he was successful in that litigation. 28 I do not accept that construction. 29 First, the language of cl 14.1 simply does not support the construction contended for by Mr Sims. The contention advanced by Mr Sims is extraordinary because it would lead to the very curious circumstance where Mr Sims could, with impunity in relation to costs, continue to bring proceedings against Suda Ltd no matter how spurious. 30 As the primary judge said, this contention as to the construction of cl 14.1 would lead to an "odd result". In my view, such an unusual consequence would require very clear words which are not to be found in the clause. 31 I might observe, that no argument was addressed to the Court on the potential effect of s 199A(2) and s 199A(3) of the Corporations Act 2001 (Cth) on this contention of Mr Sims, and, accordingly, I make no findings in relation to that issue. 32 Secondly, even if there was otherwise some substance in Mr Sims' contention as to the effect of the concluding words of cl 14.1, the indemnity would not operate in the circumstances of this case. This is because the concluding words of cl 14.1 provide that the indemnity would apply in relation to claims for "a breach by the Company of its obligations under this Deed". The proceeding which Mr Sims brought in WAD 255 of 2014 was not of such a nature. 33 Accordingly, Mr Sims' appeal is dismissed with costs. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate: Dated: 7 September 2016